Can the U.S. Lead Global Decarbonization?

Can the U.S. Lead Global Decarbonization?

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Joseph Aldy: So welcome to   the Harvard Kennedy School Energy Policy  Seminar. I'm Joe Aldy, faculty member here   at the Kennedy School and I have the pleasure  of hosting the seminar series this semester.   Before we get started, a couple of notes of  thanks. I'd like to thank the Salata Institute,   the Harvard University Center for the Environment,  the Environment and Natural Resources Program at   the Belfer Center and the Mossavar-Rahmani Center  for Business and Government for their support of   the seminar series. And especially I'd like to  thank Liz and Paul for all of their support,  

making everything go smoothly with our seminar  series. I'd also like to thank Amanda Sardonis,   who's long supported the work through this  seminar series. Amanda's about to join the   staff at the University of Vermont and help  them in what they're doing, but she's been   a phenomenal colleague and supportive of  everything we've done on energy environment   and resource issues here at the Kennedy School  and the Belfer Center for quite a long time.  I'm thrilled that we have the opportunity to kick  off the seminar series, which like last year is   hybrid. We are Zooming, we have colleagues joining  us via livestream right now, but thrilled to have   the opportunity to kick off the seminar with a  discussion about what the United States can do   in leading the efforts to decarbonize the global  economy. We have with us today Joseph Majkut,  

who is the director of the Energy Security  and Climate Change program at the Center for   Strategic and International Studies. In his role,  he leads the program's work, understanding the   geopolitics of energy and climate change and  working to ensure a global energy transition   that is responsive to the risk of climate change  and the economic and strategic priorities of the   United States and the world. Before joining CSIS,  Joseph worked as the director of climate policy   at the Niskanen Center where he led that group's  efforts to research and promote carbon pricing,   low carbon innovation, regulatory reform, and  other microforms to speed decarbonization.  In 2014 and 2015, he worked in the US Senate  as a congressional science fellow supported   by the AAAS and the American Geosciences  Institute. As an economist, I always love   being with a PhD in atmospheric sciences who  appreciates the elegance of pricing carbon   and has developed a greater appreciation  as well the politics of this to have a more   thoughtful and nuanced view than sometimes we  economists might have. But with that, Joseph,   I want to say welcome to the Energy Policy  Seminar. I'm going to hand it over to Joseph  

now who will give us some opening remarks and  then we'll open it up to the audience for Q&A. Joseph Majkut: Thank you so much for   having me. Scientists are known for their ability  to understand the nuances of public policy and   not make insane declarations about what should  happen. It's really nice to meet you all and I  

look forward to a robust discussion. Thank you  for having me, Joe and everybody at Harvard.   I'll skip the preamble. I was a scientist. I  entered the public policy space a few years ago.   It's been a very interesting career trajectory.  If students want to talk about that, I'm more   than happy to spend time later doing so. I've just  sort of always tried to devote myself to problems  

I find intellectually interesting and being at  the intersection of expertise and politics has   been a place that I've just found incredibly  intellectually satisfying as I'm sure all of   you will. Our work at CSIS is by our own design  meant to inform public policymaking in the United   States with an eye toward what happens outside  the United States. And for energy policy that   means we need to be attentive to what's happening  domestically as well as what's happening abroad.  The history of our program is actually I think  important here. Our program was stood up during  

the energy crisis of the seventies and eighties  and the focus for a long time was energy security   and that meant relatively good access to oil and  gas resources to fuel the US economy. It meant the   real close connection of our national security  strategy with our energy security strategy   and it also gave the US a role to play in sort of  providing a global public good, which was a stable   environment or stable security environment for the  oil and gas industry globally. And I kind of have   been interested over the last couple of years,  I'm like what roles the US going to play in energy   transition that might be somewhat analogous? Where  do we try to devise strategic initiatives that can   help the US contribute to decarbonization but also  give us a role to play that the US policymakers   want to see us have. One that's influential,  one that competes with China or other countries.  And today I want to talk a little bit about  what that might look like and happy to hear   your feedback. I think there are a lot of  people who are trying to paint a picture  

of what that should look like, but no  one's really quite sure what it will.   The title of the talk, I can't remember what it  is, can the US lead global Decarbonization? It's   not meant to really mean anything specific, but  it's meant to kind of probe at those questions   of how do we create global public good  with the politics that we have here today?   A couple of places where I think US climate  leadership has actually been important. I   actually think it was important for establishing  the Paris Climate Agreement. Paris Climate gave us   long-term climate goals, two degrees centigrade,  well below that toward 1.5 C, and I think the US   having a relatively ambitious regulatory program  under the Obama administration went to that. 

I think the US having a diplomatic effort, which  brought China fulsome into the fold was important   to that, helped resolve this sort of developed  versus developing nation conflict that had   kept climate talks from really being  global in scope or setting global goals.   And I think it's interesting to ask now,  okay, we're about to do this UN stocktake,   so are we leading on emissions? That might  be the place to start. That's the thing that   drives global climate change. We know we  need emissions to go to zero or net-zero,  

but we know we need to get them to zero if we're  going to arrest the march of global warming.   And skipping some stuff that I think is  uninteresting now. UN stocktake is taking place   this fall. So I think we also want to know where's  the US standing amongst all the other countries. 

UN report from this month shows that emissions  will probably peak and then maybe peak or slightly   fall over the coming decade. This is based on  what countries have pledged to do so we have a   somewhat long plateau for global emissions and we  kind of find ourselves, I think now near the peak,   if not beyond it. And that's challenging  for a world that wants to get to 2C.   Long-term, the UN's assessment finds that we're  probably targeting a world that looks at like   2.5 degrees centigrade by 2100. It's a remarkable  victory over where we were a decade and a half ago   when I started working on this issue. We regularly  talked about four or five degrees centigrade   global warming by the end of this century,  but it's a far cry from where we want to be.   And the stocktake also assumes something that  I think is relatively important. That countries  

are going to buy and large meet the climate  goals that they've already set for themselves.  The US, under the Biden administration has made  a ton of progress and probably wants to go to   climate meetings this fall saying, Hey, we're  doing it. We've got it done. We rejoined the   Paris Climate Agreement, but on top of that,  we've accelerated our national ambition. So  

we're now saying we want to cut our greenhouse gas  emissions against the reference value 50% by 2030,   50 to 52 I think is the exact number. We passed  the Bipartisan Infrastructure Law, which is going   to make a ton of investments in clean energy  technology. It's going to keep our existing   nuclear fleet alive. And then last year we passed,  the Congress passed on a partisan basis, the IRA,   which is going to turbocharge clean energy  investment and I think justifiably you can claim   it already pretty [inaudible 00:08:25] in  the outlook for US greenhouse gas emissions.  

So what if we measure right? There's a paper in Science this summer compiled   modeling results from nine different groups.  Did anybody from Harvard participate in this?   [inaudible 00:08:39] at all? Maybe not. Nine  groups, they found that in the presence of the   IRA, economy-wide greenhouse gas emissions from  the United States should fall between 33 and 40%   by 2030 against the reference value, which is  2006 for weird historical reasons that we can   just leave unaddressed. It's a notable but not  extreme improvement. In the lack of the IRA,   those same modeling groups find the expected fall  would be 25 to 31%. The underlying economics of   clean energy and the policies in place at  the state level already meant the emissions   were supposed to fall in the United States,  especially in the power sector, but now the United   States is going to spend handsomely on reducing  emissions. We get another five to 10% out of it.  Science paper admits that the abatement  cost is somewhere between 27 and $102 per   ton of CO2. That's what we're paying to reduce.  Average of $61 a ton. That compares favorably to  

reasonable estimates of the social cost  of carbon. But since Joe Aldy's here,   we'll also say that it compares disfavorably to  the cost. If we were to impose a carbon price,   which we could get away with a much lower  number and get the same emissions reductions. Joseph Aldy: Thank you. Joseph Majkut: You're welcome. But compared to our goal, we   still find ourselves wanting. The emissions gap is  set to be somewhere between a half and a gigaton  

of CO2 per year in 2030 between what our ambition  is and what the IRA is slated to accomplish.   And that is of course, if we can actually finance  site and deploy all the stuff that those computer   models think will be economical in the presence  of fairly handsome tax credits. I think that that   is definitely something we're going to have to  work toward through permitting reform or other   things. I'm going to box permitting reform. If  you guys want to talk about it in the context   of the conversation, that's great, but  I do not want to waste the hour on it. 

Let's compare that to the global  gap in ambition. And there I think,   I discovered this past week, the IRA is actually  kind of a rounding error, which I think is weird.   It's historical investments in climate and in  energy, but the UN estimated the gap at 2030   for 1.5C. If the world was really going  to do it at 20 to 24 gigatons of CO2.  

So an ungenerous comparison says that you  need 40 IRAs. No one else in the world has   the fiscal space to do an IRA level amount of  subsidy, but you need 40, well maybe the EU,   but you need 40 IRAs to accomplish the emissions  reductions necessary to get on a 1.5 track. And   for 2C where you need about half the emissions  reductions by 2030, you need 20 IRAs. So we find  

ourselves in this funny place where we are making  big investments and we are really changing the   nature of the energy system in the United States,  but it is woefully too little for the challenge we   face globally and even against our own goals.  We're going to find ourselves falling short.  But I think it's also important to note that US  climate policy and I would say global climate   policy are also changing. That the goal or the  emissions reduction is an important geophysical   metric, but it's not the only metric along which  governments are trying to devise climate and   energy policies. Over the past few years we've  seen governments take very different routes and   a different approach. We now have policies based  on industrial policy, investment, building stuff,   trying to capture the value that everyone  anticipates will be associated within energy   transition. And as capital accumulates in those  different emerging industries, we expect costs to   fall, learning by doing. And then one of the  key arguments that we now see our political  

leadership making is the IRA is maybe going to  miss emissions targets. Maybe it's not really an   emissions policy, it's an industrial policy. It's  going to reduce the cost of clean energy. That   clean energy is going to proliferate around the  world and that is a global public good in and of   itself. It's a different externality than climate,  but we can approach this one through subsidy.  In stylized models, we're also starting  to investigate what that looks like.  

Rhodium Group published a paper just  over the summer trying to understand,   well if we get cost reductions in the  technologies that the IRA is supporting,   the not out of line with standard learning  by doing models, and then we have a world,   there's a sneaky part in the modeling, but then  we have a world that really cares about climate   change and the institutes a global carbon pricing  regime. What is the amplification of the emissions   reductions that we get out of IRA around the  world through reducing costs. And they found   between now and 2100 an amplification factor of  what I would say is 2.5. Amplification factor is   vocabulary I'm using. It's not vocabulary that's  in their paper, but that's a kind of like a carbon  

value associated with this learning by doing. It's also interesting because if the US can make   those technologies cost competitive in the  global landscape, you're also talking about   export value for the US. We really like export  value in oil and natural gas. Those have been   good for our economy. They create all sorts of  opportunities for economic statecraft and the   clean energy transition can do the same thing.  Boston Consulting did a study also within the   last year looking at IRA technologies, finding  that the potential export value across the ones   where we might be able to carve out a competitive  position against China, which we'll talk about   in a little bit, is like 20 to 30 billion within  the next decade. That's the same size as today's   LNG industry. It's the size of our grain  exports. You're talking about clean energy  

being not an overwhelming export commodity from  the United States, but a relatively sizable one.  How do you do it? I think realizing  that requires a total reframe of how   the US engages internationally on climate. I'm  just not convinced personally and I'm willing   to argue about it because I could be totally  wrong. That the future of climate leadership  

is going to big meetings and saying, we're  doing this and we want you guys to do this.   I think the persuasion we're going to have to  leverage internationally is going to be much more   about it's in our common interest to share these  technologies to arrive at a new kind of trade   agreement and that the terrain for US leadership  on climate is going to look very different than   it has over the last decades. We were successful  and we did a good job, but the problems we face   now are going to be totally different. That's because the energy transition   is largely like this physical thing. It's an  engineering problem, it's a political problem,  

it's a science problem, but we have large systems  for fossil fuel production distribution and use   that have to give way to systems that will depend  on minerals on infrastructure and technology.   My former colleague Nikos Tsafos who's now  the chief energy advisor to the Greek Prime   Minister in his final essay for CSIS wrote  about this in a way that I'd like to quote.   He noted that, "Oil, gas, coal chemicals today  together account for 40% of all shipping traffic.   The move away from fossil fuels to low carbon  energy sources will change what international   trade meets." That's not just the rules,  it's the stuff that gets moved around.   Returning to the quote, "And this shift  presents enormous strategic challenges."  What are those enormous strategic challenges and  can the United States play a role in addressing   them? Returns us to my original question of  what is US leadership and how do we carve out   a positive role for ourselves? It's helpful  to sketch the characteristics of the net-zero   economy before we think about the tools we want to  deploy. Take the IEAs net-zero economy study from  

a couple of years ago, too much hullabaloo about  the timescales and some probably poorly phrased   things about implications of a net-zero economy  for fossil fuel investment. They actually do a   really great job of trying to understand what  does the energy system at net-zero look like   and that's going to be relatively invariant,  I would argue whether we get there in 2040,   2050 or 2070. And they find that in that  scenario the oil market is much smaller   than it is today, but it's probably going  to have to be really emission sensitive. 

And so for the US as a large oil and gas exporter  and one that's probably going to be in a position   to export more as we reduce our own consumption,  trying to build an oil and gas market, excuse me,   that's really, really good on methane emissions.  That looks at the emissions intensity of the full   value chain and has at the combustion side as  much carbon and capture utilization and storage   technology as we can feasibly muster. It's crazy  important because that's a place where we have   an immediate economic and strategic advantage. The  mineral economy and the net-zero world is going to  

be much larger. So if the oil and gas economy sort  of shrinks down to 20% of today's current size,   that's a factor of five smaller. The mineral  economy probably grows by a factor of five.  I think that's a coincidence. I don't  think there's some rule of nature that   causes that to be the case, but we don't  have at this moment a particular strength   in the mineral economy. We dig a little bit of  stuff out of the ground in the United States,   but it's really hard to do here. We also don't  do a lot of the processing or intermediary   manufacturing steps that have ended up to  be really important in how markets and those   commodities get set up. The US probably needs to  develop a strategy for that. If anybody has any  

brilliant ideas on what that strategy should  look like, I have a think tank job for you.   And then lastly, they're going to use  a whole different suite of technologies   and the technology innovation place is where  the US probably has a chance to carve out a new   and revised role for itself because of the IRA. Okay, so there's a couple of transitions here,   got sidetracked. First is minerals. That's  shifting the extractive economy away from coal,  

oil and natural gas toward cleaner and then to  mining. And the second is industrial. That's the   technology story. No one gets energy services from  a lump of copper. Instead, we need to establish a   supply chain that can give the world solar cells,  wind turbines, batteries, heat pumps, copper wire,   hydrogen electrolyzers, carbon capturing  membranes, all this machinery of a high renewables   net-zero economy. And at the moment, China  dominates the supply chain for almost all that.   Part of the enormous strategic challenge that I  think Nikos was talking about is we have to build   a larger and more diverse supply chain for those  goods really, really quickly to supply a net-zero   economy, to make it easier for countries to reduce  their own emissions and in doing so, we have to   trade an energy system that's relatively diverse. OPEC Plus is super powerful in establishing market  

prices, but we get oil and gas from all over  the world. There's a lot of energy security that   comes from that. These are really sophisticated  markets that can respond to perturbation well,   with one that's heavily concentrated in a  strategic adversary of the United States.   I'm not particularly China hawkish, I will admit.  In Washington these days. That's kind of the  

favor, but there's all sorts of reasons why you  want to pursue resilience through diversification.   Just to give you a couple numbers on that, because  I think there actually is risk to this. At each   stage of the clean energy supply chain, China  has a commanding lead. For critical minerals,   it produces more than 90% of the rare  earths that make magnets for turbines   and motors. Produces more than 90% of the  world's polysilicon for photovoltaics and  

that has real issues for human rights, forced  labor concerns regarding Xinjiang province.  It refines 70% of the world's cobalt, more  than 60% of the lithium. Both are critical for   batteries. And one of the key insights that  industrial policy does give us and can help   us develop is that that whole supply chain  matters. If you have the intermediate step,   if you're doing production of a certain kind, that  gives you buying power on the upstream that helps   set the conditions for the labor and minds in the  Congo that you otherwise don't really have a lot   of power or influence to do anything about. And  it's also a matter of economic strategy if we're  

looking toward an energy transition. It's a lot  of value that's going to be gained from being   able to support manufacturing facilities  or be a part of this technological story.   The IRA is designed to do that. Sorry  it took me so long to get to IRA,   but part of the criteria of the bill,  even the most severe onshoring provisions,   which contravene decades of global economic and  trade policy are about bringing the benefits home.  And I would say that the argument in Washington  it's like kind of true, is that if you didn't have   this sort of protectionist, hawkish onshoring  component of the IRA, it would not have been   as large or as ambitious as it was and it may  not have passed at all. Even in a democratic  

controlled Washington. Policymakers need and want  to demonstrate early wins for their constituencies   and the coalitions that will back continue to  action to reduce emissions over time, and that's   what the IRA is trying to solve for. And it's  totally clear that this is kind of working.   I'll take one example, but there's a few others.  I don't really, I'm so tired of talking about EVs,   so I was going to talk about solar. Is that  okay? Okay. EV's in the question period. US right   now has eight gigawatts of solar manufacturing  capacity online, which actually is not terrible,   but most of it's at the final stage.  So you're assembling from constituent  

materials to modules. This is the stuff that  you actually put into a field or on your roof.  Right now, I think Wood Mac when I last  looked expects, so we're going to install   about 30 gigawatts of solar capacity in the  US. So we actually produce at the module level   a relatively fair bit of what we need. Let's  say you're going to get on that climate path.   The Princeton group led by Jesse Jenkins does some  really interesting modeling trying to understand   the material needs of energy transition for the  US. I would say a rough number, though their   scenarios vary, is you're going to need about  70 gigawatts of solar capacity additions in the   United States by the end of the decade every year.  That's a significant public policy challenge in   energy markets and in land use and a whole bunch  of other things, but you also just need the stuff. 

And for the stuff, the story is actually kind of  interesting. Post IRA, if you look at industry   data of announced projects by 2030, we might have  up to 85 gigawatts of solar module manufacturing   capacity online in the United States because there  is an enormous tax credit for making solar modules   in the United States under the IRA. Those tax  credits are also slowly affecting the upstream.   So we're looking at 43 gigawatts of solar cells.  That's the little circle that you pack into   modules, 20 gigawatts of silicon ingots and wafers  and seven gigawatts of inverter capacity. So the   subsidies are driving an onshoring of this supply  chain that'll help meet US needs, diversifying   and enlarging the global solar supply chain in a  way that's pretty helpful. There's still a sort  

of like if you have 85 gigawatts of solar modules  and you only have 20 gigawatts of wafer capacity,   you still need to use a global supply chain. You  can't be [inaudible 00:23:36], cor should that be   the goal, but there is a pretty significant  set of investments that's being made here.  The same story is happening in EV supply chains  as well. We're seeing a lot of announcements about   battery factories and that's now sort of bleeding  down into the upstream parts of that supply chain.   The problem is that onshoring comes  with at the cost of efficiency.   You have to subsidize production here in the  United States because it's more expensive to   make solar panels or EV batteries here. US  DOE estimates that domestic manufacturing  

of solar panels cost 30 to 40% more than in  international markets. That may come down a   bit as we learn how to do here in the US,  but a lot of it is labor and high margins   expected on investment in the United  States and those things aren't going to,   I don't think structurally change, nor should  we design climate policy so that they have to.  It means it's unlikely we're going to become a  significant exporter of solar technology. We're  

just, under IRA, we're going to pay more  and use more, a domestic of supply chain.   But for alternative technologies, we  actually might find opportunities.   A good example here is this case for First Solar.  So First Solar is they manufacture solar equipment   here, they're a US based company. They manufacture  here in a couple places in Southeast Asia.  

Totally different chemistry than the crystal and  polysilicon that we typically associate with the   falling costs of solar. I don't want to get into  a debate over which one is better, but part of the   diversification shouldn't just be geography. It  should be like technology. Maybe we need to find   competitive routes to developing technology that  US firms can support. We do a bunch of innovation   at our fancy universities including here and  the neighboring institution as well. And we want  

to find a pathway that they can, when innovation  happens here, it gets supported, it gets deployed,   and then it can be exported because that's  where we get amplification of our efforts.  In December of 2021, the Development Finance  Corporation made a $500 million loan available   to First Solar to develop a manufacturing facility  in India where they can make their solar cells for   deployment in the Indian economy. India has  truly ambitious targets for deploying solar   power to meet their energy needs and development  needs. They also want factories as part of their  

economic development story. So there's a fairly  robust industrial policy going on in India. It   can be matched by investment from US and suddenly  you have kind of an interesting story developing   where the US can provide technology and financing  to help a country that is really important in   geopolitical jockeying right now, meet its climate  and energy goals, diversify its own energy supply   and there there's a real win-win here and I think  finding those opportunities is crazy important.  The key question is I'm not sure  how to make a list of the next 10,   20, or 50 projects that should receive that  kind of support. And we probably structurally   can't put all this on the shoulders of  the Development Finance Corporation.   If we want to decide that's a pathway to the US  being a climate leader by helping other countries   establish their own role in the energy transition,  meet their own industrial policy goals,   I think we're going to need to think carefully  about what are the conditions under which   we want to do that? Which technologies,  which manufacturers should the US support?  We have a long history of nuclear diplomacy. Are  we going to pick that back up? We have recent   experience with LNG, but which technologies  that are on the frontier? Green hydrogen,   carbon capture and utilization, long duration  storage. How do we help create strategic  

diversification without undue cost is a really  big question. I think this is totally available   for intellectual and academic scrutiny. How  should we score that kind of investment? I   can kind of talk at a diagnostic level of why  we think it's good, but how much we should be   willing to spend and where we should spend it  and how we should think about strategy. And  

one that changes over time as the technology and  policy, as the relative cost of technology change   and as the strategic interests of other countries  change, I think is totally rich and interesting.  Now we can talk about trade. I  also am totally into climate clubs   because the other thing that has to go on is  we've got to rewire trade. I also think that   it is possible that climate clubs help us move  toward a world where we have more efficient   instruments. I don't think you want to create  a world where you just got industrial policies   everywhere. People are fighting over who  can own this piece of the supply chain,   who can control this piece of the supply chain.  We need to make sure that we sort of like,  

oh, this is flagrantly illegal in the eyes  of the WTO. We need to make sure that on   the process of trying to decarbonize, we don't  break world trade or lose the efficiency that   has been so good for global economic growth and  therefore just screw up a bunch of other things   in the attempts to solve the climate problem. There's a couple of guidelines here that I think   are interesting. Trade lawyers talk about a lot of  this stuff, but can we develop a trading framework   that's going to accept these kinds of subsidies  on a temporary and targeted basis? Can we accept   it in others? There's now this enormous trade  case that's about to kick off in Europe regarding   the import of Chinese electric vehicles and the  boundary between just better technology and stuff   that has been over subsidized and is being dumped  is hard to draw. And I think we're just going to   have to work really hard to figure out where we  want draw the lines. But an even larger scale,   I think it's important to think about the  trade agenda in the era of energy transition.  

US is embracing protectionism.  Other countries will do the same.   Europe's also standing up a carbon  border adjustment mechanism.  For the first time it starts next month, companies  that ship certain products to Europe are going to   have to report the CO2 emissions associated with  them and in a couple of years they're going to   actually have to pay as if they were paying into  the European emissions trading system. Pretty   textbook carbon price and border adjustment  policy design. But it's immediately causing   political challenges. It's being challenged at the  WTO and there are threats of reprisal. Officials,   I think from India. I was writing this morning,  I couldn't find the citation, but I know what  

happened. Have even threatened like we're going  to border adjust European goods but not on their   carbon content, on the historical emissions  associated with the European economy. So you   already immediately tools which look really good  in the academic and intellectual sphere, in the   political world look really, really challenging  and could cause all sorts of downstream problems.  By the same degree the picture's mixed.  Other countries look at the European Sea   Band and start going, oh, maybe we should carbon  price because that way we will capture revenue   that would otherwise go to Europe and we would  don't want that to happen and we would then have   smoother trade with European colleagues. Examples  here are Japan and Turkey. Biden administration   I think has been relatively ambivalent about  the EUs border adjustment, but does support   integrating climate and trade on a more sectoral  level. So they've backed the global arrangement  

for sustainable steel and aluminum which would  have the US and the EU cooperate on standards   for the emissions associated with the production  of those two goods. And there'd be trade censures   for countries outside those two who wanted to  import steel and aluminum into the US or the EU.  But also, like I said, I've spent a lot of my time  trying to figure out how do we build a bipartisan   consensus around climate change? How do we make  progress at the center of American politics? And   I can tell you without a shadow of a doubt, the  interest in carbon tariffs, border adjustments,   some sort of trade and climate tool is extremely  high on both sides of the aisle in Washington,   for different reasons and we need  to figure out a path through that.   But there is this widespread belief that  the US economy is more carbon efficient,   even in its most carbon intensive places  than other economies, particularly China.   So the more we account for carbon and traded  goods, the more competitive our producers   will be. I'll insert her parentheses here.  The carbon pricing advocate in me must say,   this is a sunk benefit if we don't have a  commensurate domestic policy to keep industry   competitive in a climate adjusted trade world, a  carbon tariff without a domestic compliment gets   the incentives I think to innovate exactly  backwards if I've got that right professor. 

So we just need to be thoughtful in designing  these things, but they're potentially really,   really powerful. I looked at a lot of the academic  literature on climate clubs over the summer   trying to understand should we devote a lot  of time and effort to build these things.   And some of the proposals that we found are like  show that it can be remarkably good at reducing   greenhouse gas emissions globally. And I would  say even that the academic results show that  

a US led carbon club can probably be the most  powerful tool that we have in our arsenal for   reducing greenhouse gas emissions. Let me cite  an example. 2021 working paper Farid Farrokhi,   I don't actually know how to pronounce  his name. F-A-R-R-O-K-H-I. And a co-author   showed that under ideal trade censure, a US led  climate club could reduce global greenhouse gas   emissions by 61% as other countries joined  in, based on their own incentives to join.  And the chain of countries is actually super  interesting. So they actually modeled it.   It's cool. I'm going to quote it. You start  with the EU and the US, big markets right?  

Next is Canada and a bunch of small countries.  Then you get Australia, India, Japan, Korea,   Mexico, Russia, Turkey and Taiwan. Once all  those are in, it's in the economic interest   of China to join your climate club. And  then last you get Brazil and Indonesia.   Once you have all them joining, to join, you  have to institute a set of optimal carbon taxes   and production taxes. You need to set up border  taxes for those outside the club, but you sort   of get a forced cooperation, which reduces  global emissions by 61%. Only 8% of that is  

due to the use reductions in the US and  the EU according to these modeling studies.   So that's a much larger multiplier of American  effort than we get on technology. Yeah. Speaker 3:  Can you define a little bit  better what carbon club means? Joseph Majkut: Yeah, totally. So it's totally different from   a carbon tariff. Oh no, I'm all good. So a climate  club in this context, to be a member, you have to   have a carbon price on your domestic production,  and then you need to have trade censures on   non-club members. And those trade censures  extend beyond carbon border adjustment. So  

the other thing that this paper shows, and one of  the things I think we need to be cautious of as US   policymakers looking at carbon border adjustments  and other tools, is that carbon border adjustments   up are relatively ineffective at reducing global  emissions. So in a climate club you have a trade   censure, which I think applies to basically all  trade. If you're outside the club, we're going   to put some censure on you associated with the  carbon intensity of your economic production.  And a carbon border adjustment, you're only  doing that on the carbon embedded in certain   products. This is what the EU is doing. But you're  doing that to bolster some sort of or prevent   unfair competition for people who fail your  domestic carbon price. And then in a tariff  

you're just assigning some tariff associated with  the carbon in goods that you want to import. That   leaves aside any domestic climate policy. So  that's how I would use the language. So the   climate club is a much more expansive version of  what a lot of policymakers are talking about now,   which is more on the tariff and border  adjustment scale. It's really focused on   carbon embedded in products, not a broader  economic measure. That makes it a much   more challenging thing probably to achieve and  probably why it ends up being so powerful. Yeah.

Speaker 3:  [inaudible 00:36:19] another question. So how  strong and absolute is a trade censure suggested,   it's not a tariff and is it a total  ban, what's the spectrum of measures? Joseph Majkut: I think it's a large import text, but I didn't   find in the paper a graph that shows you how  large it is. There's a bunch of very complicated   equations. I'm betting it's expensive. You need  it to be big enough to incentivize people to join.   So one thing I think is really interesting is  can we engineer something as powerful as those   climate clubs or something that gets some of that  power from where we are today, where we're much   more focused on industrial policy, technology  solutions. We have reluctance to embrace carbon   pricing at the domestic level, but we do see  a willingness to link the climate agenda with   the trade agenda to protect domestic industry and  to capture some advantage or perceived advantage.  I have some ideas for how that worked, but  I think we can talk about in the discussion.  

I think that's kind of the next very interesting  opportunity for finding a path to progress in the   US. I think it helps a trade agenda, which is  climate and industrial policy smart will help   us amplify our own efforts out of the IRA. And  I think that gives me a sense of what the US   leadership stance on climate may look like. It's a  little hawkish, but I'll start there. I'm actually  

going to stop because I hit 40 minutes and that's  about what I wanted to target. I'll close with   two things. I want to thank Joe for having me  and I really look forward to a conversation. Joseph Aldy: Great. Thank you Joe.   I'll open with the first question and  then we'll open it up for questions   from the audience and we'll run until  13:15. And as a reminder to everybody  

when you get the microphone, a question is  a sentence that ends with a question mark. Joseph Majkut: Goes up at the end. Joseph Aldy: So you talked here at the end   about the idea and the potential for climate clubs  and I want to ask two questions about this. One,   and I reflect on this to a conversation I had  with a representative of a developing country   when I was in the US government and they noted,  United States, we can sometimes be selective on   when we decide to work through the UN. And  they noted that the problem for them is the   UN only forum where they actually get a voice.  And so it's frustrating when the US kinds of  

selectively engages through full global  multilateral processes versus doing something   bilaterally or in a small group. So you began  today talking a little bit about the UN stocktake,   but closed a lot of discussion on what is  small clubs that may grow over time if we   create the right kind of incentives. So how,  if you were to say advising the US government,   you're trying to get other countries,  you're trying to amplify your impact,   you're trying to get more countries involved.  How do you think strategically about this mix   of fora that you're going to operate through? When is it in your interest to use an existing   global forum like the UN negotiations? When should  you strive to create fundamentally a new form,   this kind of trade climate, industrial  policy, maybe that's reinvigorating the WTO,   but there's a lot of a WTO reinvigoration plate  beyond just this. So how do you think about the  

strategically, how would the US effectively  engage through these different fora? And   then I have a second question about clubs and  supply chains, but we'd love to hear this first. Joseph Majkut: Yeah, the answer is   probably related. I am a believer in small  coordinated clubs making progress and then   bringing that back to the larger fora, excuse  me, for diffusion and amplification. I think   that's very consistent with the model that  Paris sets after the Glasgow conference.  

I remember writing this really excited  essay about the First Movers Coalition   and these plurilateral deals around just  transition. Some of those things have worked,   some of them haven't. As we learn what is going  to be effective in navigating this relatively   challenging set of considerations, I think I'm a  fan of smaller clubs. I take well the point that   there is, not a discontinuity, there's a slight  contradiction. If what you're saying is, man,   the climate strategy of the United States should  be economic integration and we should be funding   stuff relative to the needs of other countries,  especially in emerging markets and developing   a strategic technology portfolio. And then we  should hammer them with these trade censures if  

they don't act right on climate. But that's  where I think these are intellectual tools   that we need to draw lines between when we're  trying going about policy entrepreneurship. Joseph Aldy: So the other question I have is   there's this vision of we're going to create  climate clubs. We're going to have this kind   of carrot and stick approach depending on  whether you're in the club or out. We're  

going to use trade sanctions on those who are  out. We also have at the same time this kind   of emerging model in US policy that's very  much about onshoring. That if anything is to   design an energy economy in the United States,  and for that matter, there are those who think   about this beyond the energy and climate space  where we just produce more of what we consume   in the US. If we're in a world in which  we're transitioning in the energy system,   so there'll be less trade by definition in  fossil fuels and related commodities. If we   think we're going to be doing more of meeting our  needs through domestic manufacturing. If other   countries try to follow our suit, do we lose  some of the leverage on trade if we're seeing   more and more of a domestic oriented climate and  industrial policy among our major trade partners? Joseph Majkut: That's an interesting question.  

I think yes and no. So   just because of good is not part of the energy  system, doesn't mean that it's not important to   greenhouse gas emissions. So what would be a good  example like steel. Steel is super important for   the energy economy, but it's way more important  than other parts of the economy. That's where   most of the consumption is. And so if you're  using trade tools to help decarbonize steel,   then I'm not sure that the energy transition  is going to perturb trade enough to cause that   to be a problem. But your broader point of if the  world gets super geopolitical and trade relations   are just really being perturbed, does that cut  off the ability of trade sanctioning tools to   drive decarbonization? I suppose it's possible,  but there's just so much trade. It's hard to  

imagine that will be what happens in practice.  I admit it's an interesting question though. Joseph Aldy: So let me open   up for questions because we have colleagues  joining us online. We're going to pass around   the mic. So please wait for the mic. I'd like you  to introduce yourself and then pose the question. Kevin:  Thank you for the presentation. Thank you for  being here. My name is Kevin, I'm a second year   MPP student. One of the big hot topic right now  at UN COP is climate finance. I wonder what your   vision for US leadership on climate finance is  going to look like. I just want to note that it  

seems that US currently is not giving or pledging  enough financing towards developing countries,   but also at the same time it seems that a lot  of them are, or at least have recently joined   the BRICS Bank or over the past couple of years  become members of AIIB, which I felt like there's   more of a economic incentive for them to align on  receiving financing from countries led by China,   for example. So wondering what your thoughts  on US leadership in that space looks like. Joseph Majkut: Yeah, that's a great question. Completely. I left   it completely open. One, we should definitely stop  over promising. I think that's a persistent issue.  

We've been working on a paper trying to understand  if there's interesting technical tools and we're   not the only people doing that. Can you make the  cost of capital lower at the same amount that we   were already given to MDBs and other things? I do  think eventually the US is going to have to figure   out are we willing to make the energy transition  part of our economic statecraft? And that's where   I think these things like the DFC investment  are really important. Do we have a particular   obligation or are we going to be particularly  helpful? Just practically speaking, like funding   a lot of renewables projects in emerging markets. I'm not so sure, but if we can help make   renewables projects in the self-interest  of countries by distributing manufacturing   or helping set up regional centers, I  think that's a more saleable option.   That's what the government is trying to do  right now with the PGII and other tools.

Kevin: What's the PGII? Joseph Majkut: I can't remember.   The Partnership for Global investment or- Kevin: Infrastructure? Joseph Majkut: Infrastructure Investment. Yeah,   I think that's probably the route forward  rather than us just like selling foreign   aid in Washington is super hard and climate  investment thus far is read as foreign aid.   We need to shift the frame in which people see  climate investment in our political leadership.

Yumna: Hello, I'm Yumna. I   graduated last year, but I work here now. Joseph Majkut: Oh, cool. Congratulations. Yumna: Thank you. So my question is about   the EU carbon border adjustment mechanism. You  said there's interest in both sides in the US for   something similar, A, because the US has advantage  in terms of energy efficiency and two, because   it's a very efficient way to cut  emissions. So my question is,  

recent evidence shows that countries that are  likely to lose the most in terms of growth in   exports and GDP are not high emission countries  like India and China, but rather poor countries   in Africa who are just very carbon intensive  in terms of exports. So I wonder whether that   debate in Washington takes into account  this maybe global equality lens and how   do you think the US climate leadership can maybe  take these potential losers into consideration? Joseph Majkut: That's a good question.   I think this also, if I can wing it a  bit, I think unfamiliar with the study,   my guess is there's this big debate in Europe  should they use some of the carbon border   adjustment revenue to aid countries or help in the  decarbonization. Because if you just have a bunch   of carbon intensive production going on, even in  an emerging market, that's not exactly what you   want to have over the long term. So some sort of  investment scheme in that context makes a lot of   sense. I don't think that won out in the end.  I think the EU decided to hold onto the money.  For the US, I don't know how much of an issue  that would present. So I will say if you think  

about how do you construct something that you  think is going to be politically feasible that   would combine climate and trade and investment and  technology like cooperation, there I think there's   a pretty significant role for the US to say we  want to onboard countries into trade arrangements   that help decarbonize that support decarbonize  early on, but see a pathway into a more   climate club construction. That would be the way  I would think about addressing that challenge. Brian:  Hi, I'm Brian. I'm first year MPA ID student.  So I have two questions. First is on the carbon   club. So my question is what is the risk that the  carbon club isolates the US instead of positioning  

in a global leadership position? Because given  the cost of decarbonizing, given the carbon   border adjustment mechanism, how I could see it is  that a bifurcation of trade roots and that would   isolate the US instead of position as a global  leader. And the second question I have is on   green investments. So would green investments  be better position as invest into grid and long   duration energy storage instead of renewable  energy investments given that renewable energy   is really cost competitive with  coal and gas in many countries? Joseph Majkut:  Repeat the second question  in a shorter version, please. Brian: Sure.  

Would it be better to invest in grid  transmission and long duration energy   storage, LDES in developing countries instead  of renewable energy given that renewables such   as solar and wind are cost competitive  with coal and gas in many countries? Joseph Majkut: So the answer to the second question is very   context specific, but I would love to learn more  about it. So the picture of energy and climate   finance is in my view, kind of still micrograde  focused. Because we're very sensitive to the needs   of developing economies, but the energy system  that we need to build has to be big and diffuse   and have transmission. So to the extent we can  invest in that kind of stuff, which I think is  

also what PGII and other sort of emerging American  models are trying to do, that's really good.   There's also just, it's like the dams of the 21st  century. Multilateral banks aren't going to build   a lot of dams I don't think, but you could imagine  building big regional grids and stuff like that,   carbon capture facilities the same way. If  you want to get to net-zero, every integrated   assessment model I've looked at says you need a  lot of capture around the world. I don't think   that's only going to be in the United States and  the Middle East. And so financing that kind of   stuff is going to need a lot of help as well. My bet is, anytime you're playing with trade,  

it's like a very dangerous game. So you want to be  a little bit careful about the policies you set up   because the urge toward protectionism and  self-isolation is probably enormous. You   want a world that has low carbon trade being  relatively free to capture the benefits of   free trade and you're using trade as  a tool to incentivize people moving   toward that world. I don't think you want to  lock it in. I think that that's a real risk.

Will: Hi,   my name's Will. I'm an MPP1. So the  US sometimes suffers from strategic   inconsistency. I think a recent example of  that would be pulling out of Paris and then   subsequently rejoining it. So from your  perspective, is there a way to insulate  

US participation and leadership in some of these  initiatives that you've described going forward? Joseph Majkut: Yeah, I think so.   Say you wanted to build a strategic technology  portfolio for the US. If you can build a coalition   of industry and business interests that want to  see that sort of expansive investment abroad,   that can have a stabilizing force. I'm not saying  it guarantees it a hundred percent, but if you   convince enough political elites in Washington  DC that your program is important and works well,   it usually maintains support even  between fairly substantial partisan   shifts. On the climate and trade  nexus. This is a place where,   like Robert Lighthizer was Trump's trade guy,  wrote in his book, defensive carbon tariffs.  

Probably on a protectionist favoring the  protectionism more than the climate stuff. But   it gives us a place to think through, okay, if I  can anchor here and then I can anchor over here on   a more textbook climate, carbon pricing and border  adjustment tool, can I start drawing the lines   and finding something that is approachable from  both sides? I think that's how I think about it. Yasmina: Thanks so much for your talk,   Joseph. My name's Yasmina. I'm an MPP1. I've got  two quick questions. The first is you talked about   the desire to onshore supply chains for renewables  and deepen our supply chains domestically.   How do we go about the conflict that is likely to  arise with environmental regulation? I'm thinking   with these rare earth materials like Neodymium  and those which are used in permanent magnets,   they are often quite toxic and often our  environmental regulations create obstacles   to us now domestically mining them and refining  them. The second question is, are we doing enough   to make sure that we're supporting the right  technologies and regulating the way that they   are rolled out? I'm thinking about biomass  energy and carbon capture, the potential   adverse incentives to cut down a lot of biomass,  maybe unsustainably and also doing CCS safely.

Joseph Majkut:  Okay. I think that we do not want to sacrifice  environmental quality in the context of pursuing   these things, but for heavy and light  rare earth, we are making investments in   processing facilities in Texas. My guess is that  they have to pass some sort of Clean Water Act   evaluation, and so we should try to do that  stuff under the highest environmental standards   possible. That's also, at least given the express  preference of policymakers in DC, what they would   like to see. A lot of complaints about the Chinese  supply chain is that it's captured the market by  

being dirtier and less controlled, not just in a  carbon sense, but also on water and air issues.  Do I think those are in absolute contest? No. Do  I think that that might impose costs or have price   effects? Yeah, sure. And it could delay projects.  On the, are we supporting the right technologies   to the right degree? Oh, man. No, not at all. You  think about the construction of the IRA, it's an   economist's field dream. Why did we give this one  30% and why does that one get 25% and why does  

this one get 3 cents a kilowatt or $3 a kilogram,  and why does one get [inaudible 00:55:09]. It's   nuts. And there's no ability or there's no  mechanism to harmonize that kind of stuff   toward more efficiency, which is something  we should really also be thinking about   doing because those tax credits only, well,  most of them end at the end of the decade.  I don't have particular comments on biomass  with carbon capture and storage. I read   once that it's potentially really bad for  food security and I sort of believe that.  

I think on the carbon capture and  storage front, how do we do it safely?   I suppose, what do you mean by safely? Are you  concerned about leakage from reservoirs and all   that kind of stuff? I think we can monitor it  relatively well. I'm not overly concerned or   I've never seen any reason to be overly concerned  about safety or catastrophic releases of CO2, like   the incidents with the lakes. Coming from a more  industrial process. I actually like industrial   carbon capture and storage because it's the carbon  management technique where there's a valve with a   dial and it tells you how much CO2 went down in  the ground. It's much easier and more tractable,   I think to scale in that way than a lot of the  nature-based solutions are probably going to be. Anurag: Hello. Hi, I'm Anurag. I'm a postdoc here. I   wanted to ask you about, since you mentioned First  Solar, I'm curious, one of the reasons First Solar   has I guess stayed in the US and stayed out  of China is because they have historically   received a lot of support from the government and  marketed themselves as an American company. But  

in the long term, people claim that if you  want to gain efficiencies in manufacturing,   China is the place to be in terms of scale and  also just competitiveness in terms of factors   of production. So what should the US strategy be  broadly in terms of any new technology? Because   any corporate company will want to move  to China to gain that advantage in terms   of cost reductions and First Solar has avoided  that path. You gave that example, but it seems   difficult for a lot of companies to avoid that  kind of transition into China because of their   manufacturing capabilities. So how do you think  of the US manufacturing strategy in the long run? Joseph Majkut: I think we should make it as easy   and as inexpensive to produce stuff here as you  can. So like permissive investment environment for  

investment. I think there's a role for permitting  reform, not sacrificing environmental quality.   I think, if we're going to choose to onshore, as  I said in the talk, we're also choosing to spend   a little bit more and that's going to limit  global competitiveness if you want to create   an export market, and that is something  that our policymakers have decided to do.   Hopefully we can capture some innovation  and be a little bit bet

2023-09-25 19:23

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